NSW Budget bets big on property boom

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By Leith van Onselen

The New South Wales Government this afternoon released the State Budget for 2013-14, which revealed a steady improvemnent in Budget finances, with a deficit of $329 million expected in 2013-14 (compared with previous forecast of $423 million), followed by surplus of $829 million in 2014-15 (down from $1.3 billion forecast).

The improved Budget outcome has been achieved primarily on the back of a big forecast pick-up in property tax receipts on the back of the strengthening housing market.

Stamp duty receipts on residential transfers are expected to jump by 17% this financial year and a further 13% in 2013-14 before growing by 8% in each of the next three financial years (see next chart).

ScreenHunter_10 Jun. 18 14.11
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Land taxes are also expected to rise solidly, up 2% this financial year before rising by 5% in 2013-14 and then by 6% in each of the next three financial years (see next chart).

ScreenHunter_11 Jun. 18 14.26

The Government also sees an ongoing improvement in housing market conditions, driven by:

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  • Interest rates at historically low levels
  • Consumer confidence has increased
  • Housing finance approvals are trending up
  • Building approvals are increasing
  • Vacancy rates are low and rents are rising strongly
  • Housing prices have begun to increase
  • Housing affordability improved steadily in 2012-13
  • Underlying demand remains strong driven by demographic trends.

Payroll taxes – the other major revenue item in the Budget – are also expected to pick-up over the forward estimates, increasing by 4% in 2012-13 and 5% in 2013-14 before growing at 7% per annum over the next three financial years (see next chart).

ScreenHunter_12 Jun. 18 14.32
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Overall, the projected strong increase in Budget revenues looks overly optimistic given the coming unwind of the mining boom, the ongoing ageing of the population as the baby boomers retire, and the already high level of household debt across the economy. Moody’s seems to agree:

Overall total revenues are projected to rise over the next four years by an annual average of 4.5%, just ahead of expenditures, which are forecast to grow at a 3.7%. However, these projections are predicated upon relatively healthy growth in tax revenue — projected to rise 6.6% on average over the next four years — which, while not unreasonable, inject some risk to budget outcomes…

As part of its normal monitoring process, Moody’s will evaluate the 2013/14 budget’s assumptions, its potential for upside and downside risks, the state government’s ongoing resolve to implement expenditure controls, and the likely impact of additional asset sales on the state’s debt burden.

Other key points from the New South Wales Budget include:

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  • Newcastle Port will be leased for 99 years, which is expected to raise more than $700 million. $340 million of this money will be spent on revitalising Newcastle, including building a light rail service.
  • Five new schools have been announced – primary schools in the lower north shore (likely in Cammeray), Strathfield, The Ponds and Spring Farm, and a high school in Crows Nest. More funding for schools is also expected under Gonski reforms, starting at $50 million for the 2014 school year, with majority of funding to come after 2017.
  • The Government will spend $1.8 billion on WestConnex road project over four years, funding the first stage itself to prove traffic useage before seeking private investment.
  • $220 million to pay for an extra 69,000 emergency department visits and an extra 34,000 hospital admissions (including 3000 extra operations).
    $585 million to trial the national disability insurance scheme (NDIS) in the Hunter region.
  • Stamp duty collection is at a record high of $4.39 million. Residential transactions are up 18.4 per cent in the past year.
  • $300 million to be spent on new infrastructure to support the development of 43,000 new homes in area such as The Hills, Green Square, Blacktown and the Hunter region.
  • A total of $14.6 billion to be spent on public transport, roads and maritime services and infrastructure, including $806 million for the North West Rail Link, $353 million for the South West Rail Link and almost $1 billion for Pacific Highway upgrades.

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About the author
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness. Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.